Zacks Industry Outlook Ares Capital, Hercules and Runway Growth Finance

Chicago, IL – November 11, 2025 – Today, Zacks Equity Research Equity are Ares Capital Corp. ARCC, Hercules Capital, Inc. HTGC and Runway Growth Finance Corp. RWAY.

Industry: SBIC & Commercial Finance

Link: https://www.zacks.com/commentary/2788313/3-sbic-commercial-finance-stocks-to-watch-despite-industry-concerns

With interest rates coming down, the Zacks SBIC & Commercial Finance industry is expected to face margin compression and lower investment income as the majority of loans are tied to floating rates. Asset quality remains at risk as prolonged high rates may strain borrowers’ ability to repay.

Meanwhile, lower rates are likely to drive demand for personalized financing, aiding investment income to some extent. Demand for refinancing is expected to improve. Regulatory changes offer funding flexibility and support the industry players. So, keep an eye on Ares Capital Corp., Hercules Capital, Inc.  and Runway Growth Finance Corp.

The Zacks SBIC & Commercial Finance industry comprises companies that provide finance to small and mid-sized privately held developing firms. These firms are typically underserved by traditional banks and other lenders. Additionally, firms suffering from financial distress are the primary target clients of these lenders.

The industry players provide customized financing solutions, ranging from senior debt instruments to equity capital. This financing is provided for a change of ownership transactions, buyouts, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors, among others. Some of the other products offered by the industry participants are mezzanine loans that typically pay high interest rates and can be converted into equity in the target firm.

Declining Interest Rates: The Federal Reserve lowered interest rates twice this year, with these now at 3.75–4%. This followed the 100-basis-point rate cut in 2024. With many industry players having floating-rate loans, falling rates will reset loan yields lower. This will weigh on net investment income.

On the other hand, loan origination and refinancing activities will likely improve as demand rises with decent economic growth and macroeconomic stability. Overall, the SBIC and Commercial Finance industry is expected to get some support from falling rates, while net investment income expansion will likely be subdued. This will weigh on industry players’ financial performance.

Asset Quality: Following the COVID-19 outbreak and a subsequent halt in business activities in 2020, most sectors wherein SBIC & Commercial Finance companies provide finance were hit hard. This raised fears of a deterioration of asset quality for industry players. Nonetheless, support from the administration in the form of stimulus packages and the subsequent reopening of businesses supported economic growth. This, thus, prevented a substantial rise in delinquency rates for the industry players.

However, with prolonged higher interest rates, industry players are likely to witness some weakness in asset quality as portfolio companies might find it difficult to service debt. Also, heightened geopolitical risk and uncertainty over tariff-related headwinds will put a strain on SBIC & Commercial Finance companies’ asset quality.

Regulatory Changes: In 2018, an amendment to the Investment Company Act of 1940 by the Small Business Credit Availability Act (SBCAA) eased leverage limits for such companies, allowing them to increase their debt-to-equity leverage to 2:1 from 1:1. This helped these companies reduce portfolio risks by investing in higher capital structures without forgoing current returns. Thus, the act provided extra funding flexibility to these companies and will continue offering more growth opportunities.

The Zacks SBIC & Commercial Finance industry is a 38-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #209, which places it in the bottom 14% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it seems that analysts are gradually losing confidence in this group’s bottom-line growth potential. Over the past year, the industry’s earnings estimates for 2025 have been revised 7.9% lower.

Before we present a few stocks well-positioned to confront current challenges, let’s examine the industry’s recent stock market performance and valuation picture.

The Zacks SBIC & Commercial Finance industry has underperformed the S&P 500 composite and its sector over the past year.

The stocks in this industry have collectively lost 13% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have rallied 14.2% and 9.7%, respectively.

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TB), which is commonly used for valuing loan providers because of large variations in their earnings from one quarter to the next.

The industry currently has a trailing 12-month P/TB of 0.96X. The highest level of 1.07X, the lowest of 0.77X and a median of 0.93X have been recorded by the industry over the past five years. Also, the industry is trading at a massive discount compared with the market at large, as evidenced by the trailing 12-month P/TB for the S&P 500 composite of 12.55X.

As finance stocks typically have a low P/TB ratio, comparing SBIC & commercial loan providers with the S&P 500 may not make sense to many investors. Hence, comparing the group’s P/TB ratio with its broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/TB of 5.62X is also way above the Zacks SBIC & Commercial Finance industry’s ratio.

Ares Capital: This Zacks Rank #3 (Hold) stock is a specialty finance firm that primarily invests in U.S. middle-market companies. Based in Maryland, ARCC provides tailored financing, mainly senior secured debt, with corporate investments ranging from $30-$500 million and power project investments between $10 million and $200 million. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ares Capital has been witnessing growth in total investment income over the last few years. The company is expected to continue seeing a rise in investment income in the quarters ahead, given the regulatory changes and rising demand for customized financing. Also, its investment commitments to new and existing portfolio companies have been steadily increasing.

As of Sept. 30, 2025, ARCC had debt of $15.6 billion and cash and cash equivalents of $1.04 million. The company has a revolving credit facility, allowing it to borrow up to $5.2 billion at any time.

ARCC has a market cap of $14.5 billion. Over the past six months, the company’s shares have lost 6.5%. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.

Hercules Capital: Headquartered in Palo Alto, CA, HTGC is a specialty finance company that provides venture capital to technology and life science-related companies. Its investments are generally between $15.0 million and $40.0 million, and it expects these to generate revenues within at least two to four years.

Despite the tough macroeconomic scenario, Hercules Capital is expected to continue witnessing the growing demand for customized financing from private equity firms and venture capitalists. The company maintains a robust balance sheet position. HTGC’s concentrated focus on its credit performance is encouraging. Driven by the rise in the demand for customized financing and a strong deal pipeline, total new commitments are expected to keep increasing.

As of Sept. 30, 2025, it had $655 million in liquidity, including $29.4 million in unrestricted cash and cash equivalents, and $625.6 million in credit facilities. The fair value of Hercules Capital’s total investment portfolio was $4.31 billion as of Sept. 30, 2025. Net asset value was $12.05 per share on the same date.

Hercules Capital has a market cap of $3.3 million. Shares of this Zacks Rank #3 company have gained 1% over the past six months. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.

Runway Growth Finance: Headquartered in Menlo Park, CA, RWAY provides senior secured loans (and sometimes equity components) to growth-stage companies mainly in sectors like technology, healthcare and business services. The company offers hybrid debt and equity financing to high-growth potential companies.

Runway Growth Finance has posted steady growth in total investment income and is expected to sustain this momentum amid rising demand for customized financing and supportive regulatory trends. This Zacks Rank #2 (Buy) company’s investment commitments to both new and existing portfolio companies continue to grow, supported by a solid balance sheet and disciplined credit management.

As of Sept. 30, 2025, it had $371.9 million in liquidity, including $7.9 million in unrestricted cash and cash equivalents, and $364 million in credit facilities. The fair value of Runway Growth Finance’s total investment portfolio was $946 million as of Sept. 30, 2025. Net asset value was $13.66 per share on the same date.

RWAY has a market cap of $357.4 million. Over the past six months, the company’s shares have gained 4.8%. The Zacks Consensus Estimate for 2025 and 2026 earnings has remained unchanged over the past week.

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Ares Capital Corporation (ARCC) : Free Stock Analysis Report

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